Regenerative Economy

Ten years have passed since the U.S. Federal Reserve Bank allowed Lehman Brothers to file for bankruptcy, attempting to signal to the market that no firm is too big or important to fail. That mistaken belief triggered panic across the global financial system. The next day, a chastened Fed decided to rescue AIG, the insurance colossus ensnarled in a credit default swap tsunami that threatened to bring down much of the financial system with it, beginning with Goldman Sachs.

The media waves are filled with analyses of causes and expert testimony on what’s changed, and questioning if it can happen again. Unfortunately, most of this decade on analysis fails to go deep enough to assess true root causes that lie in issues like purpose and systems design principles. Without such analysis, we can say with confidence, as many pundits agree, that it can and will happen again.

To avoid such an outcome, to which governments are far less capable of responding than they were ten years ago (perhaps one of the most dangerous consequences of the crisis), we must fully internalize four fundamental lessons from the crisis:

Lesson 1: Finance is a sacred trust upon which societies rise and fall, and the modern global financial system is inexorably dependent upon the support of Central Banks, and the U.S. Government (and China) in particular.

The unprecedented, multi-trillion-dollar rescue of finance largely worked as hoped. And any pretense of a “free market” financial system is a fraud. We should understand the global finance system as contingent socialism. The system, when in crisis—which is the only time the socialist part is relevant—is fully backstopped by the full faith and credit of the world’s major governments. There can be no other way, so we must think and act accordingly.

While many bankers lost their jobs, including some fat cats, few lost everything, and most recovered just fine. The real human costs of the financial crisis have been born by ordinary citizens in the real economy. Trauma of this magnitude causes damage that reverberates for generations. Millions lost their jobs and homes with profound consequences on families’ life-long emotional and financial well-being. Billions more around the world had their livelihoods profoundly shocked or worse. More have been permanently scarred from the cascading effects of the credit crunch on consumers, businesses, towns, schools, hospitals, indeed the entire real economy and with it, the social fabric of society. Local, State, and National Governments have had their financial positions damaged, leaving them far less resilient to weather the many interconnected crises arriving at an accelerating rate, from bridge collapses to storm devastation, from the opioid addiction to the mental health crisis affecting our children.

Such costs should be seen as unacceptable by modern governments with an interest in survival, no different than invasion by an enemy power. The scale of government response must reflect this reality. This is the implication of a contingent socialist financial system.

Lesson 2: The global response to the financial crisis was wrongly focused on saving finance to save the economy.

It is true that a financial collapse would destroy the economy, but it does not follow that saving finance will save the real economy. In the contingent-socialist finance that we have, like it or not, it is incumbent upon governments of the leading powers to create structures and institutions that protect economies from catastrophic loss. Finance has lost the opportunity to self-govern itself in such a way to make it safe for society. All actions have consequences. Similarly, it was necessary following WWII to conceive of NATO to protect Nation States (and society) from themselves.

The lesson is that Finance is embedded in, and inseparable from, the real economy and society as a whole. Any notion of a “financial sector” apart from the broad economy is, in reality, a fiction, useful to clever financiers who exploit the contingent socialist contract for massive gains, on the backs of the citizens without their knowledge or consent. The speculators even have a name for it: The “Fed put” which allowed them to actually increase risk-taking focused on banks, knowing full well that the Fed would not allow the system to collapse. Heads I win, tails society loses, while the speculators’ bet has a floor under it. It’s like free insurance, and financiers understand the value of free. The aggressive ones load the boat on “free” to the direct detriment of society.

Modern Finance extracts by design, and therefore undermines the health of the host within which it is embedded (the real economy). In fact, “to extract value” is an ordinary and unquestioned term within the practice of finance. The distribution of costs and benefits from financial activity is asymmetrical and extreme. Finance takes a disproportionate share of the winnings when times are stable, while distributing the losses across society during crisis: this is contingent socialism.

Lesson 3: Malfeasance coupled with injustice has consequences.

The injustice of the bailout has been seared into our collective psyche. None of the worst offending fat cats went to jail. Few were held accountable in any meaningful way. No doubt the political tribalism here at home and across Europe is, to a significant degree, a result of the financial crisis and associated human misery, made worse by the ill-informed austerity policies the crisis brought in its aftermath. Then, to make a terrible situation unpalatable, there has been a complete lack of accountability for those responsible (private sector and public sector alike). The public knows in their guts that this contingent socialist system (referred to now as simply “Wall Street”) is fundamentally unfair, they are understandably angry, and the western political order is in great peril.

Lesson 4: Without a fundamental strategic reassessment, we cannot change the nature and ideology of finance. Indeed, it has not changed.

Many of the regulatory responses to the financial crisis were tactically correct, but, as can be expected, they had unintended consequences. It was correct to increase the capital and liquidity buffers of banks (it arguably should have been more). It was correct to tackle the off-balance sheet derivative exposure through the use of centralized exchanges for much of the counterparty risk. It was correct (but unrealistic) to attempt to create “living wills” for banks. It was correct to attempt to reign in speculation with the Volcker Rule. Nevertheless, all these changes have been heavily negotiated by the banks who retain too much power to determine their own fates. And some of these good intentions have proved to be practically very difficult (Volcker Rule in particular). And the cost of dealing with all this new regulation means greater fixed costs for all, harming the smaller banks we need more of, while creating further economies of scale for the very largest. Indeed, the too big to fail banks of today are much larger than during the financial crisis a decade ago. Even if they are better capitalized, they most certainly remain too big to fail, and they are far from fail-proof.

Tactical responses to the flaws of the last crisis without a fundamental strategic reassessment about what is the purpose of finance, and what kind of financial system do we as a society want (and in fact need), can only deliver incremental improvements. Tactical responses cannot change the nature and ideology of finance. Indeed, it has not changed.

A strategic assessment of what went wrong a decade ago (and what went wrong on the hundreds of prior financial crises) must begin with two questions:

First, what is the purpose of finance?

And second, will we accept any financial activity that is deemed by society not to be in the interest of the health of the whole system (the real economy within which finance is embedded)?

I would suggest a thorough and serious evaluation of the first question is long overdue. And I hear virtually no real discussion by those in power about the second question beyond some bashing and shaming the villains in finance. What is missing is an evaluation of our finance ideology and the grip it has on us as a society. We must find the right questions to ask.

Questioning financial activity and its consequences for society, like the fact that much of modern finance emanating from Wall Street is dedicated to short-term speculation which we confuse with “investment” rather than in service to the real economy. Or like the predatory nature of much of the rush to securitize assets in what has become known as financialization or even the positive-sounding and implied “market completion” by financial economists. Let us be clear: the subprime crisis was never primarily about extending home ownership to low-income households as we would be led to believe by the “market completion” narrative. It was about manufacturing massive quantities of securities with high yields that could be sold to yield hungry investors with correspondingly massive fees taken out in the middle by financial predators. The tail wagging the dog with horrendous human consequences. We as a society can and must decide whether we need to allow anything just because it’s possible (we don’t). Yet we do allow it.

To begin a conversation about these important questions and more, I plan to release “Regenerative Finance”. The thought piece asks a singular question: what would finance look like if it were to operate in service to the economy and a healthy biosphere? Such an approach to finance is one that is aligned with the principles of regenerative economics as articulated in my previous work, “Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy” (2015).

We will take a living-systems view of what the design principles of systems that sustain themselves for long periods of time actually look like, and use this as an objective, ideology-free lens to assess finance strategically, rather than reactively and from engrained ideological positions which is the conversation one usually sees in the Financial Times and the Wall Street Journal. Political difficulties with policy implementation are suspended while we get clear on where we actually need to go.

We will present the project in the coming weeks and months in four acts following an introduction to provide context:

Act I:Implications of the Regenerative Paradigm for FinanceAct II:The Failures of FinanceAct III:Towards Regenerative Finance and a New Investment TheoryAct IV:Agenda for the Genuine Financial Reform We Need

Your feedback and suggestions are not only welcome but they are also a vital part of the project. So please send your thoughts in writing to feedback(at)capitalinstitute(dot)org and accept our sincere gratitude in advance. You can also share your suggestions on social media using the hashtag #DearFinance. Our aim is to revise the draft based on your input before publishing a final product by year-end.

I sincerely hope this project will be worthy of your good energies and can be shared among your networks. Collectively we can begin to shift the conversation on Finance, an ideology that has come to hold a grip on us, and even absent bad behavior by financiers, threatens all we hold dear in the process.

I had the pleasure of hearing my friend Nora Bateson speak last week at The Players Club in New York City where she held a reading and conversation around her recently published book, Small Arcs of Larger Circles: Framing Through Other Patterns.

If that title slows you down a bit, well, I think that’s the point. The book is a collection of essays and poems, and the conversation with Nora included personal stories of growing up in the Bateson household (Nora’s father was the pre-eminent systems scientist and anthropologist Gregory Bateson, whose first marriage was to Margaret Mead. Nora’s grandfather William, was a biologist who coined the term genetics.)

Collectively, the passages in Nora’s book draw us into a state of heightened curiosity that leads us to question how we perceive reality, ultimately enabling us to better understand our world and the challenges accelerating all around us. She invites us to probe the profound difference between our now four-hundred-year-old reductionist way of thinking (which is rooted in the Scientific Revolution), and the demands and mystery of a more accurate, complex living systems view of the world. Critical to the understanding of this more accurate world view is Nora’s enigmatic assertion, itself an invitation to the most important conversation we could be having:

“The opposite of complexity is not simplicity; it is reductionism,” she mused.

In the context of our interconnected 21st century social, political, economic and ecological challenges, the critical distinction between complexity and reductionism is far from a trivial one. It is, in fact, a life or death insight.

It is precisely because these indivisible challenges are rooted in complexity that our continually applying reductionist thinking to them has led to disastrous consequences.Overcoming them depends on our shedding our unconscious reliance on reductionist thinking and adopting a more holistic way of looking at our world.In other words, our failure to comprehend complexity itself, in an increasingly complex, interconnected world that seems to be spiraling out of control, may well turn out to have life or death consequences for many of us, and even civilization itself as we’ve come to know it in the Modern Age.

Admittedly, reductionism – breaking down what is complicated into its component parts so they can be analyzed and understood – has made immeasurable contributions to the progress of human civilization. The laptop I’m typing on and the man on the moon are achievements made possible through the reductionist method.But as Wes Jackson says, “there’s nothing wrong with the reductionist method so long as you don’t confuse the method with the way the world actually works.”

Holistic thinker Allan Savory once illuminated for me that complexity is profoundly different than what’s complicated.An iPhone or an airplane is complicated.With time and ingenuity, it can be perfected and then mass produced, the same every time.We humans have become experts in making what’s complicated, thanks to our now well-honed expertise in reductionist reasoning and problem solving.

But complexity is a different animal altogether.A nation is complex. A city is complex.A business is complex.A rainforest is complex.War is complex.So too a marriage, a family, and our human self – our physical body, as well as our collective body/mind/spirit.The complexity of a living system is distinguished by the ever-changing context that surrounds it and affects it, with feedback loops and consequences impossible to fully comprehend in advance.Our political economy, in the context of culture and place, is such a complex living system.

Bateson explains that living systems that survive over time are characterized by mutually supportive learning networks that continuously communicate and interact across multiple contexts and variables in the system.Yet we pretend to believe we can manage complexity as we manage what’s merely complicated, with our rules and protocols, and our key performance indicators designed through reductionist logic.In today’s America — a complex system if there ever was one — the danger is compounded by leaders who seem to think they can govern without reference to accurate information, better known as “facts,” without which trust-based communication is impossible.

Trust issues aside, our challenges run even deeper.Bateson writes, “The education system that reaches around the globe is a mess… The violence of breaking the world into bits and never putting it back together again substantiates the kind of blindness in which we have separated ecology from economy, and psychology from politics.”I would add another reductionist “violence”— the separation of what used to be called “political economy” into politics and economics.From the professional silos in which business and finance, governance and the law operate today, we literally can’t “see” the patterns that define the interconnections of complexity accurately enough to have a chance to manage them in a way that the times demand.In truth, our aim should be to constructively guide and flow with the complexity that defines modern reality, since complexity can’t really be “managed” in the sense of asserting control.How many presidents, CEOs, or regulators, or any of “the people running the world” understand that?

Gregory Bateson famously wrote: “Break the pattern that connects and you necessarily destroy all unity.”Yet we don’t even see the patterns, much less honor the resulting unity as the essence of our health, even our survival.Instead, in our ignorance, we break such patterns all the time, for example, the carbon cycle, which has resulted in the climate change that we now view as a “problem” to solve.In reality, it is the unforeseen but direct consequence of our failure to perceive, understand, and humbly work within complexity.

We humans have evolved into problem solvers using the reductionist method, a direct outgrowth of the Scientific Revolution.It’s now baked into our DNA, limitations included.A Second Scientific Revolution is underway, one that integrates the reductionist method with the patterns of connection that define our integral reality.Our life depends on it.

I had the privilege of spending a full day in Buffalo last week before delivering a lecture on Regenerative Capitalism, at the invitation of Amit Goyal, Director of the State University of New York at Buffalo’s RENEW Institute. Regenerative thinking and action is what defines an emergent Buffalo. It is taking place across scales, and it is working at the edges of the private sector, the public sector, the non-profit sector, and the research university.

RENEW is an impressive “university-wide, interdisciplinary research institute that focuses on complex environmental issues, as well as the social and economic issues with which they are connected.” The seven participating schools include the College of Arts and Sciences, the School of Management, the School Architecture and Planning, the School of Engineering and Applied Sciences, the Law School, the School of Public Health, and the School of Medicine. RENEW’s own vision calls for a regenerative economy, and even a one-day visit to Buffalo left me feeling the regeneration happening in real time. It was yet another example, together with our now 35 “Field Guide” stories, which gives me confidence that regenerative economies are indeed an emergent phenomenon happening everywhere on the ground, often in distressed cities and communities where the pressure for change is the greatest. This is as expected, in accordance with our understanding from the science of physics and how natural systems change in response to pressure.

I experienced three distinct manifestations of regeneration during my Buffalo visit.

The RENEW Institute, with an impressive $25 million budget, is certainly a shining example of higher education commitment to interdisciplinary (integrated) thinking and work, the future of higher education in this integral age. Amit likes to say they are looking for “T people” as opposed to “I people” to join the institute. An “I person” is the traditional academic expert, with deep knowledge within his or her field. A “T person” on the other hand, must demonstrate deep knowledge within a discipline, but also be a lateral thinker who can integrate ideas and discover new potential and solutions by working across silos. This is no easy feat as anyone familiar with the academy can attest. Listening to Amit during my visit, and to the Provost during the introduction to my lecture, I got the sense that the University is bound and determined to work at what we like to call the “edges” – the boundaries where different systems (or in this case disciplines) meet – leveraging its considerable domain expertise while at the same time forging relationships of exchange where the real regenerative potential lies.

The second manifestation of regeneration happening on the ground is the People United for Sustainable Housing (PUSH) Buffalo initiative, under the leadership of the energetic Aaron Bartley. Bartley is a Harvard Law grad who returned to his hometown to contribute to its regeneration after decades of decay from what was once one of America’s leading and wealthiest cities when it served as a vital trade hub. Ten years young, PUSH and its partners have transformed neighborhoods one building at a time – inspiring work. Walking block by block with Aaron and sharing brief greetings with local residents, the regeneration was palpable.

Finally, there is the Buffalo Billion, a signature economic development project of Governor Cuomo, who has committed to invest $1 billion into the Buffalo economy. A central premise of regenerative economics is what we call “robust circulation.” This includes ample reinvestment in the economic system to ensure its vitality. Too often wealth is extracted from regions and reinvested elsewhere. Faced with decline often caused by external shocks, modern austerity ideology in the name of balanced budgets (see Europe post financial crisis) only furthers economic decline by starving a community of the vital reinvestment all healthy systems demand. After decades of disinvestment and decline, it is vitally important that the public sector engage in Buffalo’s regeneration in order for it to succeed. The city is very fortunate to have been selected by Governor Cuomo as the target for such large-scale investment.

I was given a tour of the massive solar manufacturing facility being built for SolarCity. At an astonishing 28 acres under one roof, it will be one of the world’s largest and most sophisticated solar manufacturing facilities when it is complete. While the solar plant is but one aspect of the Buffalo Billion, it represents the majority of the funds being invested in an innovative public-private partnership under which the State will actually own the plant.

Our regenerative framework favors a more diversified, risk-mitigating investment strategy, and greater focus on vital, enabling infrastructure and education than on individual enterprises. That said, if successful, the new solar facility will no doubt create a regional hub for innovation and employment, and generate tax revenue that will support the infrastructure improvements the city so sorely needs. The regenerative potential of a project of this scale, coupled with all the other positive things happening in town is truly impressive.

It was exciting to be in Paris during the COP talks on Climate. There was an unprecedented united movement of scientists, civil society, progressive business leaders, investors, and activists representing social and ecological interests from around the world, all demanding our political leaders put the common good ahead of national interests and actually lead. Soon we will know the results.

Even the best-case outcome in Paris will be insufficient, that much is clear. And the hard work of implementing the voluntary pledges on the ground lies ahead. Canada, under new leadership, deserves praiseworthy attention for its 180-degree turn to the right side of history. Saudi Arabia deserves global scorn for its continued disingenuous interference with progress. America did its part, but of course could always do more. Yet Congress awaits…

The course for the next five years has been charted. Action is rightly now the operative word. But a second line of inquiry continues to simmer below the headline grabbing pledges and initiatives, like Bill Gates’s $1 billion leadership commitment (1.25 percent of his net worth, it must be said) on the Breakthrough Energy Coalition that will invest in clean energy innovation. Of course innovation is essential. But genuine solutions that address root causes are far more complex. For starters, our short-term obsessed financial system needs its own reinvention to effectively serve this unprecedented challenge.

That second line of inquiry is at the heart of Pope Francis’s courageous, wise, and now controversial Encyclical, Laudato Si’, calling for an “integral ecology.”

Four hundred years ago, the leading Enlightenment thinker Galileo Galilei was sentenced to house arrest by the Roman Inquisition under the auspices of Pope Paul V for his belief in Copernicus’s heliocentric view of the universe. The idea that the Sun and not the Earth was at the center of the Universe was heretical, and seen as a direct challenge to scripture and the authority of the Church. The injunction ordered Galileo:

“to abstain completely from teaching or defending this doctrine and opinion or from discussing it… to abandon completely… the opinion that the sun stands still at the center of the world and the earth moves, and henceforth not to hold, teach, or defend it in any way whatever, either orally or in writing.”[1]

Today it is the Pope himself being challenged as a heretic of sorts. He is a heretic to those who subscribe to the conventional, reductionist belief system that sees science as separate from spirituality, and religion as separate from politics and economics. At the core of this contemporary belief system is what Berkeley Ecological Economist Richard Norgaard calls “the Church of Economism,” which has “reshaped the diverse cultures of the world and come to function as a modern secular religion.” This is the “religion” of free market, neo-liberal economics as the arbiter of all questions of the day, as advocated by politicians on the left and the right, by business and financial elites, and even by many environmental advocates. Anyone who challenges this faith, including the Pope himself, had better be prepared for scorn and ridicule, the modern-day equivalent of house arrest.

How far we have come since the birth of the Enlightenment! While the irony is rich, the dangers are great. It’s time for a new enlightenment, grounded in a holistic worldview which understands that everything affects everything, and problems cannot be managed within the expert disciplines that currently define our institutions. The Pope’s Encyclical asserts: “It cannot be emphasized enough, that everything is interconnected.”[2]

Modern science in each of its disciplines understands this to be true: quantum physics for example and the web of life in biology. So too the core religious beliefs, Eastern and Western, express this central idea of interconnectedness, often expressed simply as oneness. Similarly our indigenous wisdom traditions promote the idea of the “unity” and the interconnectedness of all life. Yet in the “house of economism,” and particularly in finance, we insist on breaking down complexity to its component parts so we can better manage them, leaving us with ignorant and dangerous concepts such as “shareholder value.” But in doing so, we lose sight of the interconnected whole as the financial crisis made all to clear.

This reality is central to the Pope’s important message. But unlike so many who challenge the modern “church of economism” with the ideology of resistance, be they champions of social justice or champions of the environment, Pope Francis points to a wiser path. He counsels that the genuine systemic solutions lie instead in our embracing “integral” thinking and decision-making: retaining what’s great about the modern system while addressing head-on its deficiencies and transcending our differences.

“We urgently need a humanism capable of bringing together the different fields of knowledge, including economics, in the service of a more integral and integrating vision.”[3]

A recent study funded by NASA, using a cross-disciplinary “Human and Nature DYnamical” (HANDY) model, found that two crucial and contemporary (interconnected) crises—”the stretching of resources due to the strain placed on the ecological carrying capacity” (climate change is a prime example); and “the economic stratification of society into Elites [rich] and Masses [poor]”— have played “a central role in the character or in the process of the collapse” of civilizations in all such cases over “the last five thousand years.”[4]

The bottom line: The stakes could not be higher: if we don’t change course, we are facing the potential collapse of civilization. Climate change is a symptom of a system-design flaw. So too is the grotesque inequality within wealthy countries and among nations. So too even is the scourge of terrorism. While we move to urgent action post the Paris COP as we must, transforming our energy system in particular, we must at the same time heed the message of the Pope and invest in the search for genuinely integral solutions.

We are pleased to share with you this unsolicited guest blog post from Bob E. Ulanowicz, an American theoretical ecologist and philosopher.

The recent media flurry over Pope Francis’ Encyclical on the environment, Laudato Si’, appears to have missed his major thrust, which happens to connect strongly with Regenerative Capitalism. Most reviews highlight Francis’ concern about global warming or his Integral Ecology – the manifold connections between the natural world, economics, society, and politics. Yet, while attention to such relationships is laudable, this focus has already received considerable notice in the academic and professional literature. Other analysts point to his critique of unfettered capitalism, yet this too is nothing new – Catholic Social Teaching has criticized unrestrained capitalism since Pope Leo XIII’s Rerum Novarum in 1891.

Instead, the radical thrust of this document relates strongly to Jorge Bergoglio’s choice of name as Bishop of Rome – Francis, as in St. Francis of Assisi, the Saint who championed the poor and outcast, and preached that poverty often was the road to deepest spirituality. Pope Francis channels the Saint in his opening section, citing Francis’ “refusal to turn reality into an object simply to be used and controlled” [paragraph 11] and relates how Francis always made sure that a part of the friary garden was to be left to God’s plants and creatures. He shows his awareness of the complex ties between the health of the natural and human worlds and the workings of finance and monetary policy by noting that “whatever is fragile, like the environment, is defenseless before the interests of a deified market, which becomes the only rule” [56], adding that the “Economic and financial sectors, being transitional, tend to prevail over the political” [175]. He argues that the “undifferentiated and one-dimensional paradigm” [106] of economics in which “the maximization of profits … reflects a misunderstanding of the very concept of the economy” [195]. He regrets that “Finance overwhelms the real economy” [109] – these days by a factor greater than 50:1[1]. Yet, Pope Francis reveals his hand most openly in Chapter 5 when he makes what might be his most counter-cultural statement:

“In any discussion about a proposed venture, a number of questions need to be asked in order to discern whether or not it will contribute to genuine integral development. What will it accomplish? Why? Where? When? How? For whom? What are the risks? What are the costs? Who will pay those costs and how?” [185].

Such questions about who benefits and who pays also tie into Regenerative Economics’ concern about externalities, and to ecological economist Herman Daly’s condemnation of “growism.” Nowadays, if a shopping center is proposed, the guiding issue is whether the project will achieve a high return to the developer – i.e., high “growth” – all other matters become secondary. In contrast, Francis states that, “a decrease in the pace of production and consumption can at times give rise to another form of progress and development” [191]. He cautions we must “contain growth by setting some reasonable limits and even retracing our steps before it is too late” [193]. Francis is confident of the need for such slow-down, writing, “the present world system is certainly unsustainable from a number of points of view” [61] and we must “leave behind the myth of unlimited material progress” [78].

These Franciscan prescriptions also speak to regenerative economics emphasis on balance. For example, studies of energy and currency flows in healthy systems show that pursuit of ever greater efficiency and growth pulls the system away from a healthy balance, and heightens the probability of collapse. In contrast, healthy systems maintain a balance between “throughput efficiency” – akin to the kind that fuels economic size and growth – and a diversity that allows for resilience in the face of perturbation. Translated into economics, processes that decrease market efficiency somewhat in order to permit the survival of slightly less-efficient actors may actually improve the system’s overall sustainability.

Studying such dynamics might also clarify how, in a world of very finite resources, to reconfigure economics to achieve a more just apportionment among the “universal destination of goods” [93]. For example, studies of natural systems also tell us that balance is improved by shorter, quicker, lower-level feedback loops – the kind found in well-knit “cooperatives,” in a sense. In contrast, today’s massive corporate structures tend to crush smaller, quicker ventures as soon as they begin to succeed, as happened with the Saturn experiment under GM.

It’s also of note that the balance between efficiency and resilience-enhancing diversity is related to Adam Smith’s balance between self-interest and “sympathy,” the kind produced when we connect to another person’s circumstances as our own. Smith argued that there was a close relationship between moral behavior and the maximization of virtue, and healthy economic behavior which involved the maximization of wealth as a means to a higher end. Self-interest drives wealth; sympathy drives virtue; only a combination of the two drives wealth as a means to a higher end. Regenerative Capitalism also emphasizes the need to balance self-interest and sympathy because the two play important roles in balancing efficiency and resilience. This is also what Rerum Novarum was about.

It remains for people of good will and organizations like the Capital Institute to elaborate the means for dialing back the overall amplitude of the economy without endangering fundamental human needs and dignity. Meanwhile, Francis consoles us by encouraging that we adopt an attitude of “less is more” and a spirituality marked by “the capacity to be happy with little”. [222]

How to reconcile the “invisible hand” with the “Golden Rule?” That question first preoccupied my mind while I was a Managing Director at (the old) JPMorgan in the late 1990’s and inspired the creation of Capital Institute in 2010. Too often, discussion around this question devolves into the same shallow debate (Capitalism versus Communism or Socialism) we see now in response to Pope Francis’ encyclical on the environment, Laudato Si’: On Care For Our Common Home, in anticipation of his visit to the United States this week. While social outcomes across economic systems are rightly the subject of continuous debate, the truth is, no system of political economy that has operated in modern times is sustainable from an ecological perspective: not present day Capitalism; not the Social Democracies of Scandinavia; and certainly not our experiences with Communism in the Soviet Union or China. Marxist scholars will correctly argue that true Marxism has yet to be tried on a large scale. I would say the same is true for the free enterprise system Adam Smith imagined when he coined the phrase “invisible hand” in his Wealth of Nations, where he explained the critical role self-interest plays in a free market economy:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

But Smith’s “self-interest” should not be confused with Gordon Gekko’s “greed is good” that permeates modern finance-driven capitalism. Students of Smith are aware that the philosophical underpinnings of his thinking appear in his earlier work, The Theory of Moral Sentiments. It is there that Smith laid out his central idea that individual selfish acts would be self-regulated in our human nature by what he called “sympathy” (what today translates better as “empathy”). The book begins:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it…That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane…The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”

In other words, Smith believed that the invisible hand would be constrained
by an ethic of reciprocity, what is generally referred to as the “Golden Rule” (i.e. do unto others as you would have them do unto you). Such a humanistic ethic of empathy and compassion is universal, uniting virtually all great religions and wisdom traditions across cultures throughout the ages. No government intervention required. It’s certainly difficult to reconcile certain aspects of modern day capitalism with a free enterprise system guided by a humanistic invisible hand built on an ethic of reciprocity that Adam Smith envisioned a quarter century earlier. So where did we get lost? First, we must embrace intelligently designed-market based solutions that will be essential for the energy system transition ahead. And while we can justifiably rant about lost morals, there is a systemic answer to where modern capitalism has lost its way that is subtler, and lies in the encyclical itself when Francis refers to the “reductionism which affects every aspect of human and social life.” Reductionism of course is the useful method of analysis dating back to the Enlightenment in which we break down what’s complicated into its component parts. But in doing
so, we too often lose sight of the whole – always greater than the sum of the parts – sometimes with disastrous consequences. Silos in academia and companies, the primacy of shareholder value still taught in most business schools, the 2008 financial collapse, and our failure to manage complex challenges like climate change via special interest delegations are well-known manifestations of our over-reliance on reductionist thinking. Smith was part of the Enlightenment thinkers ushering in the Age of Reason and individualism with its forces of logic and analysis over the traditional lines of authority, most notably the overbearing authority of the Catholic Church itself. It would no doubt surprise him to learn that economics had become separated from the humanist impulse underlying his thinking, and that the reductionist method would become conflated with “science” and “technological progress” affecting (and at times overwhelming) “every aspect of human and social life” at the dawn of the 21st century. Modern science (quantum physics, the web of life) understands that everything is connected to everything. So too do all major religions and virtually all wisdom traditions understand this core principle, often summarized by the concept of “oneness.” Our challenge now, after 500 years of amazing progress in many respects, rooted in Enlightenment derived-reductionist thinking, is to usher in what the Pope calls an “integral and integrating vision” in alignment with what Adam Smith himself intuited. Such integral, or holistic thinking lies at the heart of our collaborative journey to a vision for Regenerative Economies at Capital Institute based on illuminating the universal patterns and principles (including reciprocity) that govern all systems that survive in the cosmos, re-uniting once again Ecology, Economy, and a humanist Spirit in harmonious right relationship. The regenerative framework is grounded in the rigor of our latest scientific understanding of all energy flow systems (everything is energy) ranging from how water boils in a pot all the way to complex living systems including human beings, human consciousness, and, we assert, human economies. We can therefore develop the practical metrics needed to monitor and manage regenerative economies effectively, and discover the true path to a broadly shared prosperity in the process. At the heart of the Pope’s important message is a call for a new way to think, not a preference of one ideology over another, much less one religion over another. It is really a call to rediscover what we already know: the beauty of our essential long-standing humanist values and traditions. The reductionist logic of the “progress” of modernity must be subordinated to these core values. Nothing more. Nothing less. How many in our polarized Congress on the right or the left will get it?

We are the poorest urban county not because we can’t produce wealth, but because we haven’t built what we need to capture it. You spend your life enriching someone else, somewhere else.

–Yorman Nunez, from the Field Guide’s Bronx Cooperative Development Initiative story, 2013 (1)

Affordable housing is very much in the news these days, especially in urban areas like New York and San Francisco where unaffordability is reaching crisis proportions. Minimum wage is clearly not keeping up with rising housing costs in these areas, but at some level most people intuit that endlessly increasing the minimum wage is a losing battle that won’t allow workers to keep up with skyrocketing rents. The unstated obstacle to finding a better way is that we lack a compelling explanation for why a growing gap between rents and income is a problem not just an inevitability. To be sure, Keynesians point out that city health in general is harmed when local monetary circulation goes down because a larger slice of income going to rent means more money flowing upward and less circulating horizontally. But, the neoclassical and neoliberal economists who dominate policy discussions tend to see this issue as simply a matter of the detritus of unerring market forces. Regenerative economics creates a very different way of looking at this conundrum – one which suggests more lasting solutions.

Regenerative economics places the problem of rising rents and falling incomes squarely within today’s context of massive and unrelenting concentrations of wealth at the very top; erosion of the middle class; and money flowing into speculative investments, not the real economy. Since robust cross-scale circulation is a critical factor in systemic health, the regenerative lens sees all of these events as signs of growing economic necrosis – the slow starvation of economic tissue due to too much money flowing to the top, and too little circulating throughout the rest of the real economy. Economic necrosis sets in when: 1) rents go up because a few people have lots of money, and higher rents extract more from lower levels; while, 2) jobs and wages are going down because the small and medium-sized, real-economy organizations that produce most jobs are experiencing monetary starvation. Increasing the minimum wage helps somewhat, but it is a temporary, Band-Aid solution to the deeper problem of a frail real-economy with feeble job-creation due at least in part to too much money flowing away from the local real-economy organizations instead of circulating throughout middle and lower scales within. In other words, there are systemic limits to the extraction of wealth by “rentiers,” not just ethical considerations.

Instead of viewing today’s situation as the inevitable outcome of free-market forces, regenerative thinking follows Daron Acemoglu and James A. Robinson’s work in Why Nations Fail (2012), seeing all of these events as indications of an extractive economy, one designed politically to support the process of wealth moving upwards. Using concrete examples such as Nogales, Mexico, and Nogales, Texas, which are culturally and geographically identical, but politically and economically distinct, Acemoglu and Robinson demonstrate that the underlying problem of poverty lies in how much the political system supports economic policies designed to move wealth upward (extractive) versus those designed to empower, develop, and circulate. These latter characteristics are all features of a Regenerative economy.

Extractive economies create an illusion of vitality by building a shimmering bubble of phantom wealth that masks an ever more fragile real economy. In contrast, Regenerative economies seek to build long-term, cross-scale, economic vitality precisely by re-invigorating the small and medium-sized, real-economy organizations that are currently so malnourished. Taken together, the key principles of Regenerative economics show how to develop exactly those structures and processes that allow local communities to both produce wealth and circulate it back into the self-feeding economic arrangements that maintain vitality for long periods of time. This is what Regenerative means.

As it turns out, the real-economy revitalization process we need is already underway as witnessed by New Economy efforts ranging from the organic farm movement to the Evergreen Cooperatives of Cleveland. As the Bronx Cooperative Development Initiative (BCDI) shows, interest in building regenerative systems is already apparent:

BCDI is guided by a deep intention to harness the essence of the people, resources, and place of the Bronx, and to enable the members of the community to co-create the borough’s regeneration… BCDI has been undertaking considerable work in laying the ground for this more holistic approach, building out a collaborative of organizations focusing on a regional development strategy to support economic democracy in the borough, with shared ownership at the core of that vision. The collaborative includes local business leaders, organized labor, anchor institutions, including hospitals and universities, and the local zoo, as well as a diverse array of local nonprofits. (2)

Regenerative financing is also beginning to emerge. Our Field Guide to Investing in a Regenerative Economy, for example, tells the story of Bendigo Community Banks (BCB). Begun in the 1990s, BCB reflects a “self-organizing” response to the closing of over 2,000 bank branches in rural Australia. Suddenly cut off from access to financial capital, residents and businesses of these communities appealed to Bendigo Bank to reestablish a banking presence in these areas. Now 300 strong, the resulting bank model – part franchise and part cooperative – has helped revive these communities, and given local leaders the business acumen and tools they need to sustain their own regenerative process.

A hemisphere away, in Sierra Gorda, Mexico, the not-for-profit Grupo Ecologico is developing innovative funding mechanisms for empowering a network of resourceful, but impoverished, small farmers and ranchers seeking to become regenerators of their own land and communities in one of the most biodiverse regions of the world.

Still, to truly revitalize the entire economy, these important efforts will require upper-level support in the form of improved financial flows, policy reforms, political reforms, and more apropos economic theory and measures. In contrast to “top-down” approaches such as conventional monetary and fiscal policy, or “bottom-up” approaches such as the local economy movement or even Occupy Wall Street, Regenerative economics sees connecting high-level reforms in a way that reinforces grassroots efforts as critical because regenerative health is a systemic affair which requires cross scale integration. We believe the Regenerative lens can clarify how to make such integrated reforms produce the sustainable vitality we all desire.

The following post was adapted from a chapter I wrote for John G. Taft’s new book, A Force for Good, published just this past week by Palgrave Macmillan. John is the CEO of RBC Wealth Management, and I am proud to be in the illustrious company of individuals like Mary Schapiro, Robert Shiller, Sheila Bair, Roger Martin, and Dominic Barton, who were invited by John to contribute to this book. I think you will find A Force for Good a fascinating read as it explores, from a variety of experienced perspectives, how the financial industry can marshall, for the long-term public good, the creative energies and brainpower it has deployed in the past to develop derivatives, high-frequency-trading technologies, and other engineering complexities.

In 2011, the Economist declared that civilization had entered into what is known as the Anthropocene era – a geologic period in which human activity is altering the health of earth. The piece contended that if we continue to operate as we have, we will cause irreversible damage to the life-supporting systems of the planet. What the Economist failed to point out, however, was the critical role that finance plays in shaping this outcome. Our relentless pursuit of the exponential growth of financial capital, hardwired into our economic system, will bring us to the brink of collapse if we don’t change course. Science tells us that our planet, along with all of its complex, interconnected biochemical systems that enable life to exist, are fixed in scale. Yet our dominant economic theories assume that our path to prosperity requires limitless, undifferentiated, exponential growth of the economy’s metabolism – defined as raw materials in and waste materials out. The emergence of the Anthropocene era requires a seismic shift in our economy. We must transition to a more sustainable and inclusive economic system that serves the needs of people while respecting the earth’s physical limits. The financial crisis of 2008-09 provided us with the perfect impetus for this shift, prompting even mainstream economists to question as never before the very foundations of our finance-driven economic system. What they and policymakers should consider is a holistic approach that takes a deeper look into the practice of finance, and in particular, long-term decision making that affects the flow of trillions of dollars of real investment in the decades ahead. In this, the Anthropocene era, large-scale investment decisions simply must be considered a vital part of the public interest and on the agenda of an informed, democratic process. The top 1,000 global corporations represent half of the total market value of the world’s 60,000 public companies and, undoubtedly, an even greater share of capital investment budgets. What demands our attention, therefore, are the decades-long impacts of the capital expenditure decisions these larger corporations make. The same goes for the impacts of large government capital expenditures like investments in infrastructure. Corporations generally make their investment decisions using an internal rate of return framework that compares a project’s expected financial return with the firm’s cost of capital. Concerns about the systematic impact on social and natural capacity rarely enter the analysis. That must change. There are three possible paths – all interconnected – to prompt that shift:

We can work within the existing economic paradigm to shift the flow of investment by making commercial enterprises begin to pay the true social and environmental cost of their operations and by subsequently passing those costs on to consumers;

Business, government and large pools of private capital can begin leading, through enlightened real investment in resource productivity and alternative energy to save money and accelerate the shift to a Regenerative Economy; And

The public can demand a new set of rules and regulations – some local, some regional, some global – to establish the necessary guardrails and mandates to force the transition.

That said, the scale and complexity of the necessary shift in thinking is unparalleled and time is not on our side. No economic system in the history of civilization has ever had to contemplate such a restraint. But the sooner we acknowledge the implications of this immense challenge, the better.

Returning to China for the first time in a quarter century this month was equally awe inspiring and terrifying. The observation deck of the truly gorgeous Shanghai World Financial Center is breathtaking, a fitting testament to China’s rise. But it was the unexpected sense that we might be experiencing history at DeTao Group’s summit in Shanghai, “Future New Economy: Sustainable Model Toward an Ecological Economy,” that left an indelible mark on me.

I had the honor to address the DeTao Group summit on the topic of regenerative investing in natural capital. Inspired by the vision and leadership of DeTao Chairman George Lee, it was an extraordinary experience.The warm hospitality and genuine appreciation and respect extended to all the visiting “experts” was quite exceptional.As George told me, “in Chinese culture, we honor our teachers.”

DeTao Chairman George Lee

The context of the summit was of course China’s unprecedented quarter century boom that has seen China emerge the second largest economy in the world, lifted two hundred million people out of poverty (so I’m told), and created middle class lives for many and immense wealth for more than a few.But this newfound wealth and power has come at a significant cost.

China is now the world’s largest carbon emitter, the result of the west’s outsourcing manufacturing production to a location where environmental standards are lower, and cheap, plentiful coal is the power source of choice.I’m told that eighty percent of the population has no access to clean water, and virtually all of the productive soil is toxic. The now infamous air pollution is making people sick and reducing life expectancies.The environmental crisis is not a special interest issue; it is omnipresent.

It was quite significant, therefore, when the 18th National Congress of the Communist Party wrote the construction of an “Ecological Civilization” into the Constitution in 2012, requiring a shift away from the industrial civilization modern China had become.Of course in an authoritarian State with single party rule, a change like this gets translated directly into policy, albeit slowly and unevenly.Note how clear China’s President Xi is with respect to the real source of wealth:

“We value both natural landscape and resource as well as material wealth. The former overrides and promises the latter.” – Chinese President Xi Jinping

I can’t pretend to know how serious China’s leaders are with respect to their stated goal of achieving an “ecological civilization,” and one certainly can’t help but notice the irony when looking at the pollution belching out of smoke stacks as you travel to and from the airport.But I was impressed with what I saw at this summit.Here are a few highlights:

The conference highlighted the work being led by ecological economist Dr. Robert Costanza in Sanya City (“the Miami of China”) to create the first natural capital balance sheet for one of the world’s major municipal governments.In his speech, Sanya City Vice Mayor Li Baiqing stated that “it is difficult for an entire society to think in a different paradigm,” and “this [management of natural capital] project is our destiny.”

Mr. Long Yongtu, who negotiated China’s entrance into the World Trade Organization and is now Secretary General of the Boao Forum for Asia, gave a remarkably honest assessment, stating that, “China is at a crossroads.After thirty years of development, people are getting wealthier but are not feeling happier.”

And Chairman George Lee closed the conference with a notable speech, calling for a “new economic system” in which investing in natural capital will be the doorway to the new economy.He has a vision for private capital working in collaboration with the public sector, enhancing the efficiency and speed of capital deployment for the shared benefits of healthy ecosystems, and the pathway to a “green mountain” to complement the “gold mountain” that has been built.

Now of course the devil is in the details.(For more on that, see my thought piece Limits to Investment.) Unleashing huge surpluses of investment capital in the name of “natural capital investment” can do as much damage as good, and much more is needed than unlocking investment capital.Indeed, Long Yongtu himself cautioned that investment had become “the bad guy” but felt it didn’t need to be.I understood what he meant when I peered from atop the Shanghai World Financial Center across endless nondescript concrete blocks of apartment buildings that stretch as far as the eye can see.

But what struck me most as I listened to the presentations and even more in the private conversations was that I was experiencing history in the making.Unlike so many conferences in the West where there is a lot of talk, and then everyone knows little will change, in Shanghai, I felt the tide shifting under our feet.I felt that a force was being unleashed, that began, no doubt, with the amendment to the constitution in 2012, in response to profound ecological and human crises.

Authoritarian leadership, like it or not, has pointed to a spot on a distant horizon and set change in motion.Five-year plans were affected, and transitioning the economic system will require an ability to plan (take note, America!).Reward systems have been adjusted.Experts are called in for their ideas.Old paradigms that brought great success in the past are put on the table and critiqued in light of the new context.No ideological debate casts a shadow, only debate about how to engineer solutions.We may not like all the answers (200 nuclear power plants are in the pipeline).No doubt there will be ups and downs, and likely crisis.Success is far from certain.

Yet powerful mainstream Chinese interests appeared interested to learn, not defend.Successful and practical business leaders like George Lee, now a practicing Buddhist, have taken up the reins and are initiating action.The mayor of a major city is establishing a natural capital balance sheet and will begin monitoring its rise or fall as “destiny.”Others will follow.We all signed a bold joint declaration, despite an imperfect translation.The media was present in full force doing interviews and reporting on the substance of the event.History was unfolding.

Notes to self: It’s in our collective interest that they get this right.Remember the name George Lee.

We are pleased to introduce this week’s guest blogger, Dr. Sally Goerner, who is joining Capital Institute as a Science Advisor.

There is an epidemic failure within the game to understand what is really going on. And this leads those who run major league teams to misjudge their players and mismanage their teams… Baseball thinking is medieval. They are asking all the wrong questions.

People see this new way of thinking as a threat, and not just to a way of doing business, but, in their minds, it’s a threat to the game itself…

But anybody who is not tearing their team down right now and rebuilding it using your model − they’re dinosaurs.

– Dialog from the movie Moneyball

In the movie Moneyball, a new scientific model shows how to reinvent baseball, allowing the Red Sox to overcome the curse of the Bambino and win the pennant for the first time in 86 years.

Today, a new scientific model – in this case a more rigorous stage of systems science based on the study of energy-flow networks – can show us how to reinvent the game of capitalism in a way that revitalizes the whole system, bottom to top.

Instead of loose analogies to ecological concepts, this new model provides the predictive theory and precise measures today’s social entrepreneurs and policymakers need to diagnose problems, identify cures, integrate efforts, guide policy, and assess systemic health. Here, the storyline of Moneyball applies as much to the games of economics and finance as it does to baseball:

A number of thought leaders and entrepreneurs are seeking to reinvent capitalism because it isn’t working for large segments of the system. In our terms, their goal is to create a regenerative form of capitalism that produces lasting social and economic vitality for global civilization as a whole.

A more rigorous stage of Systems Science can show us how to turn today’s lopsided capitalism into vibrant regenerative economies. Whether it is called complexity, systems or networks, improved insights into our interdependent world are coming from the study of whole systems, the dynamic relationships that bind them, and the conditions under which they thrive. Today, discoveries of how energy drives development are merging with ancient understandings of nature’s designs to produce a rigorous understanding of systemic health and development that applies to living, non-living, and social systems including economies.

The future will belong to those who have the vision to use this scientific model to build a better world − and who have the chops to make this regenerative reformation happen.

I call this work Energy Network Science (ENS) because it uses energy networks and nature’s designs to illuminate universal laws and optimal patterns of health and development.

Energy fuels organization, drives development, and creates pressure for change. Because such principles are universal, they help explain why similar laws apply to systems as diverse as living organisms, ecosystems, and economies. Because they are empirical, they explain why rigorous findings apply across this range as well. Already well-known in ecology and living systems, the result is measurable laws of health and development that work in economies.

Easy to see and measure, ENS’ patterns focus our economic efforts on making human networks healthy, as well as on making money.

Because ENS is about networks, its big realization is that the only way to build a vibrant economy is to build healthy human networks. Because it values human networks, it brings a new vision of the relationships and values needed to build vibrant economies. Because it is a (relatively) exact science, it provides a solid foundation for a regenerative economy and the measurement tools we need to build it.

The result enhances New Economy efforts by:

✓ Identifying the optimal network structures, right relationships and peak patterns of development that the cosmos uses to build healthy, self-sustaining, learning systems;

✓ Showing the logical connection between whole-system dynamics and the boom-bust cycles seen in human systems, thus providing effective diagnoses of their causes and cures;

Fractals as optimal designs & measurable targets: Scientists since the ancient Greeks have studied the universal patterns that fill our world. Today most researchers believe such patterns exist because they support some aspect of systemic health. Lungs, for instance, have a branching structure ─ with a few, highly-efficient, big conduits on top and successively more numerous, less efficient, smaller conduits on the bottom ─ because this particular structure optimizes the diffusion of oxygen into the bloodstream. Nowadays we call this pattern a fractal and use new mathematical methods to measure them precisely. Because fractal patterns help optimize many forms of function and flow, they are found in everything from leaves to river deltas.

We can use fractal balance to:

Quantify the observation that “too big to fail” is deadly and a shrinking middle-class indicates ill health;

Confirm that sustainable prosperity is an integrated, cross-scale affair requiring proper balance of localism, globalism and all points in between;

Ratify the Goldilocks Rule that systems need organizations that are “just right” for catalyzing processes at each scale. So, just as ecosystems need fine-grained wetlands to buffer against floods, so banking systems need small-scale local banks to serve small-scale needs that are uneconomic for big banks to handle.

*****

We experience outsourced jobs and decrepit schools as local events, but underneath we know they are symptoms of global economic dysfunction. ENS can provide the tools we need to turn dysfunction into regenerative vitality. Stay tuned for more details.

Nikos Salingaros (Google “Fractal Cities”) shows that a proper balance of pathways helps catalyze critical city functions at each scale – e.g., footpaths support neighborhood conversations and highways support rapid transit. Supporting the full gamut of processes increases innovation, empowerment and community cohesion.

The Club of Rome was founded in 1968 but really came into the public eye with the publication of Limits to Growth in 1972.The controversial book, which sold 12 million copies in 37 languages, first called attention to the systemic limitations of the exponential expansion of the human population and the related material inputs and waste outputs of its economic system on a planet that is fixed in scale.

The concept is not complicated.Sooner or later, the endless expansion of the metabolism of a system within a finite body will cease.

Critics and the media misinterpreted (or willfully distorted) the message at the time as a prediction of imminent collapse.The authors were accused of being neo-Malthusian alarmists, personally attacked, and dismissed.If there were any doubt about that dismissive conclusion it was reinforced in the following decade of the eighties, during which deregulation ushered in an era of seemingly boundless prosperity.The authors were quacks; their systems dynamics models were wrong; there are no limits to growth — end of discussion.

One problem:Turns out reality is tracking the modelers’ “business as usual” case remarkably closely.

Courtesy of OurFiniteWorld.com

Several recent studies, the most prominent one by Australian physicist Graham Turner, have validated the basic accuracy of the systemic interconnections the original study highlighted forty-two years ago.We are tracking the “business as usual” scenario quite well, given the limitations of these early systems models in 1972.Critically, we are just now approaching the moment of truth with respect to the economic indicators that the models anticipated, as the charts below demonstrate. Furthermore, as Turner explores, it is possible that the 2008 financial collapse, and the ongoing economic malaise, may actually be linked to the looming tipping point around 2015 that the “business as usual” scenario indicated back in 1972.

This is the context in which Club of Rome Co-Chairs Anders Wijkman and Ernst von Weizsaecker convened the annual meeting of the Club of Rome in Mexico City last week.The theme of the conference was the energy transition off fossil fuels, which juxtaposed nicely against Mexico’s new commitment to clean up corruption in Pemex, the State-owned oil company, while also welcoming (and this is where it became surreal but also very poignant) new foreign direct investment, previously banned, into exploration partnerships with Pemex in order to accelerate fossil fuel extraction with the goal of reversing the State’s declining oil revenues.

This is exactly the tension underlying what I call our “$20 Trillion Big Choice.”While we focus as we must on the monumental challenge to mobilize the necessary policies and investments to transition the world off fossil fuels, those sitting on our existing stock of fossil fuel reserves, from Exxon to Mexico, are naturally seeking to optimize the exploitation of those reserves, which remain highly profitable as long as we continue to ignore the costs of global warming.And the $20 trillion “choice” is harder.It means not only ceasing to invest new capital to expand fossil fuel extraction – $674 billion last year alone – it means writing off some $20 trillion of existing proved reserves (“stranded assets”) rather than cashing them in (as a comparison, the direct financial losses of the subprime crisis in the U.S. were a mere $2.7 trillion).

The divestment movement now well underway is focused primarily on the 25 percent of this stranded asset issue owned by public companies.(See Rockefeller Brothers Fund historic decision to divest.)Exxon, the successor company to John D. Rockefeller’s Standard Oil, has responded to the Rockefeller decision with a statement about their concern for those facing energy poverty.Touching.

But the real question is the largest and most complex geopolitical challenge of all time:how can we restrain the exploitation of existing proved fossil fuel reserves, not only those controlled by the Exxon’s of the world, but even more difficult, the 75 percent of reserves controlled by nation states like Mexico (and Saudi Arabia, Iraq, Iran, Venezuela, Canada, and Russia just for starters) whose economies (and social cohesion) are currently highly dependent upon the continued sale of oil and gas?

I was privileged to address the attendees at the Annual Meeting on “Financing the Energy Transition.”In my speech, I addressed three interconnected monumental challenges:

The overarching context of limits to growth, which implies a corollary limits to investment a challenge no economic system has ever had to contemplate.

Jane Jacobs once said, “it’s not how big you grow, it’s how you grow big.”

As we reflect on the prescience of the Club of Rome’s seminal work on limits to growth, nothing could be more important at this pivotal moment in time.Future growth and development, beginning with the energy system that fuels it, and the business models that define its qualities, will need to evolve as living systems have done over billions of years, to more intricate, regenerative systems.

Watch for the Club of Rome’s next act, shifting from prescient diagnosis, to a search for genuine solutions, rooted in a systemic level understanding of the forces at play.We can say for sure that there are limits to mindless growth.Regenerative economies nurture mindful growth and development.This is the future we had better embrace.

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To read John’s full address to attendees of the Annual Conference of the Club of Rome, click here.

Henrik O. Madsen joined Norway’s DNV, the world’s leading ship and offshore classification company, in 1982. Thirty-two years later, as Group CEO of the recently merged DNV GL, now a Euro 2.5 billion global enterprise, Henrik made a speech few CEOs will ever have the opportunity to attempt.

He chose not to waste the opportunity when he addressed a crowd of 4,000 guests gathered in Oslo last June to celebrate the company’s 150th anniversary. The “V” in DNV, after all, stands for “Veritas,” which translates from the Latin to “truth.” Without a doubt, Henrik spoke it on that day, as I suspect he always does.

In addition to moving reflections on the culture that has endured through a century and a half in business, he boldly articulated the profound challenges and opportunities ahead, and reminded the audience that “unlimited growth on a limited planet is a physical impossibility.” He went on to describe DNV GL’s commitment to sustainability, both for the organization itself and for its 80,000 customers around the world. It takes uncommon courage to discuss limits to growth of material and energy use when your largest client industry groups include shipping, and oil and gas.

In a press interview following the anniversary event and a two-day roundtable on sustainability that I was privileged to participate in, Henrik repeated his mantra, “you can’t have unlimited growth on a limited planet,” to the entire Norwegian business and political community. He and his colleagues went on to criticize the State-owned oil company Statoil for their decision to invest in the environmentally destructive and carbon-intensive Canadian Tar Sands. Statoil is DNV GL’s largest client.

During the two-day roundtable, we assessed and critiqued the concept of a “Regenerative Economy,” grounded in an understanding that living systems that survive are by their very nature regenerative. We agreed that as a living system, the human economy must itself operate regeneratively to be truly sustainable. It was a vision, we concluded, for an honest conceptual framework to describe how economies must work on Henrik’s “limited planet” if humanity is to change course and is not to destroy its own nest.

DNV GL’s intuitive commitment to Regenerative Economy thinking is well grounded in its own culture and business practices. In a very real sense, like the many projects described in Capital Institute’s Field Guide to Investing in a Regenerative Economy, DNV GL is already living the principles described in the conceptual framework. It is showing that not only is it possible, it’s already very real, if only we had the economic framing to better describe it. As Einstein famously said, “it is theory that determines what we can observe.”

There is probably no such thing as a truly regenerative global company today, but DNV GL is one of the few large global corporations that demonstrates many of the key regenerative qualities that together lead to long-term prosperity. It is undoubtedly no coincidence that DNV GL just celebrated its 150th anniversary.

What is particularly interesting about DNV GL in the context of sustainability is its ownership structure. Never a public company with absentee so-called “owners” placing short-term capital market demands on company decision-making, DNV was owned by a foundation until its merger with GL in 2013. It now has a minority partner, the German family that owned GL for decades. This means the owners are in deeprelationship with the company (and now with each other), and assume the responsibilities and long-term stewardship that goes with such a genuine ownership relationship.

This stewardship has been defined by an unwavering commitment to a clear purpose: “safeguarding life, property, and the environment,” and core values (integrity, non-hierarchical, open communication) that drive its business throughout the world.

The second foundational element of DNV GL’s stewardship is its commitment to invest an impressive five percent of its revenues in long-term research. This investment is not limited to product research directly linked to near-term revenues. It includes, for example, the cost of convening a series of multi-day roundtables on deep, long-run sustainability challenges with a group of leading thinkers from around the world. DNV GL’s goal is to grow smarter and wiser, in order to better position itself as a leader for the new opportunities that the world will offer in the future.

DNV GL’s ownership commitment to purpose and values, and its commitment to research is also quite profound from a living systems perspective, and therefore a key to DNV GL’s “regenerativeness.” As living systems thinker, Jane Jacobs once said, “it’s not how big you grow, but how you grow big.”

Systems scientist Sally Goerner teaches us that living systems can only grow sustainably through increasing their structural intricacy and through continuous reinvestment in learning. A cell divides into multiple, more differentiated cells (becoming more intricate) rather than simply growing into a larger cell lacking the necessary infrastructure to support itself. And as Darwin taught us, living systems are continuously learning and adapting qualities best-suited to long-term survival.

DNV GL is able to sustainably “grow bigger” by honoring these same principles. For example it builds the intricacy of its own management structure by remaining non-hierarchical despite its global reach. It insists on, and measures, the continuous and relentless communication of its values and encourages open discussion about the tensions where those values may be hard to translate into other cultures around the world, or conflict with short-term business objectives. And its commitment to reinvest profits in long-term research (rather than have that value extracted by short-term “financial engineers”) to ensure the organization is in continuous learning mode demonstrates in part what it means to be a regenerative organization. Spending a few days with the people at DNV GL convinced me these values are authentic. Capital Institute will illuminate the full DNV GL regenerative story in an upcoming Field Guide.

Is Henrik the type of business leader for whom we are desperately searching as we face the daunting challenges of the transition to a truly sustainable economy? Is his team at DNV GL able to compete in the global marketplace while stewarding these seemingly utopian, but I would call, regenerative principles?

One hundred and fifty years of experience suggests that the answer is a resounding “yes.”